PhD, Researcher
• Insight
Indices insights: Do factors prevail in emerging markets?
The empirical evidence for factor premia in emerging markets is clear: the seminal research by Fama and French (1993, 2015) shows that stocks with high book-to-price ratios, high past returns, high profitability, low investments, and small market capitalizations have outperformed their counterparts over time (see animated insight below).
Authors
PhD, Head of Sustainable Index Solutions
Selecting stocks with these characteristics should therefore lead to outperformance (versus the market index) on a long-enough investment horizon. Is generating alpha in emerging markets really that simple?
Yes and no. Although there is strong evidence for factor premia, the research by Fama and French (and most other academic studies) is purely theoretical, and the factors they construct don’t take into account turnover or liquidity considerations. The momentum factor, for example, buys stocks with high returns in the recent past. But given that returns are volatile, the stocks that are considered to have ‘high momentum’ are different every month. This makes the implementation rather challenging, since rebalancing your multi-factor index every month can be a costly endeavour.
In our Robeco Multi-Factor Equities Indices, we harvest factor premia in a more efficient way. For example, by using factor definitions that lower the volatility of the strategy, or by using smart index construction that makes an explicit trade-off between getting more exposure to the factors (resulting in more potential alpha) versus the associated trading costs of doing so. This results in a robust and efficient exposure to the documented factor premia that, just like the theoretical evidence, can stand the test of time.
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